TMI Blog2017 (7) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... nd these documents have to be verified. The DRP order is non speaking order. Therefore, this issue is remanded back to the TPO/A.O. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. Payments in the nature of cost contributions/ reimbursements - Held that:- TPO has disallowed this expenses by making adjustment with respect to consultancy charges of ₹ 2.68 crores which was totally ignored by the Assessing Officer while giving effect to its order dated 15/11/2010. The A.O is directed to make proper adjustment as relates to consultancy charges and then quantify the addition. Appeal of the assessee partly allowed for statistical purpose. - I.T.A .No. 160/DEL/2011 - - - Dated:- 29-3-2017 - SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh. Rakesh Gupta, Sh. Ronit Tiwari, CA For The Respondent : Sh. Amrender Kumar, CIT DR ORDER PER SUCHITRA KAMBLE, JM This appeal is filed by the assessee against the order under Section 143(3)/ 154 read with Section 144C of the Income Tax Act, 1961. 2. The grounds of appeal are as under:- 1. That on the facts and in circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost contributions/ reimbursement paid by the appellant are valid business expenses and genuinely pertain to the appellant s business operations; 4.6. not taking into cognizance the additional evidence that was submitted before the Hon ble DRP to demonstrate that intra - group services were actually received by the Appellant which were commensurate with the payments made in that aspect; 4.7. not appreciating the functional analysis conducted by the appellant and holding that the appellant has not benchmarked the international transactions in the nature of cost contributions/ reimbursements; 5. That on the facts and circumstances of the case and in law, the Ld. DRP has erred in confirming initiation of penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate reasons for such initiation. 3. The assessee is engaged in manufacturing and sale of pet foods in India. It also imports snack foods confectionary and certain pet foods brands for resale. The assessee is a subsidiary of worldwide mars group based in USA. On a reference by the A.O, the TPO has made an upward adjustment of ₹ 9,20,98,565/- in respect of the arm s price of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not able to substantiate its claim that the services were actually required by the assessee. The DRP observed that in most of the cases, the assessee did not file any evidence to show if these services were actually rendered at all by the AEs to it. The DRP further observed that in none of the cases, the assessee furnished any evidence to prove that the assessee has derived any economic or commercial benefit from these alleged services. Thus the DRP held that the assessee failed to furnish the total quantum of the cost incurred by the AEs and the use of any reliable keys for allocating the expenses to the assessee. The TPO has found that the assessee had sufficiently strong infrastructure of employees for project and plant operation, marketing and commercial operation, logistic research and development and human resources development. In the absence of any complete failure on the part of the assessee to prove that the AEs has actually referred any services and the assessee has drawn any benefit for the same and that any reliable and credible allocation keys has been used for allocation of the expenses to the assessee for which the assessee has reimbursed its AEs and the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s AEs and salaries to such expatriates employees were paid by AEs outside India for 'administrative convenience and such expenses were subsequently reimbursed by the assessee. Thus Salary Expenses of two Expatriate Employees amount to ₹ 3,89,52,783 i.e. ( 70,71,703+ 3,18,81,080). The reimbursement agreement is at page no. 151- 159 of the paper book. Page No. 164-172 and 173-180 of the paper book are the copies of agreement for expatriates salary reimbursement. Page no. 212- 223 of the paper book are the copies of computation of income of Mr. Guy and Mr. John Villiams- expat employees- showing that the salaries reimbursed were offered by them to tax in India. Page No. 224-228 of the paper book are the copies of assignment, arrangement letters issued to these two employees containing details of their role and remuneration payable. Page no. 229 of the paper book is the brief profile of Mr. Guy and Mr. John showing their level of knowledge and experience in Mars group globally due to which they were seconded to India with valuable expertise and experience. Page no. 23 of the paper book is part of Audited Final Account where -Mr. Guy has been shown key managerial personnel. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and were paid salaries/emoluments based on the above-mentioned variable factors. Thus while the employees were sent to India for a certain period of time, the employees were still rightfully entitled to the same level of salary as they were earning in their country origin. Accordingly, the Ld. AR submitted that it is highly inappropriate and completely incorrect to compare the salary levels of the expatriate employees with the salary level of assessee s other Indian senior management personnel. Further the Ld. AR pointed out that both the employees brought with them the valuable expertise and experience for the assessee company. 10. In this regard the Ld. AR also relied on the judgment of Hon ble Karnataka HC in the case of CIT vs. Motor Industries Co. Ltd. (1997) (223 ITR 112) (Kar) wherein the Hon ble court held that The commercial expediency of a businessman s decision to incur expenditure cannot be tested on the touch stone of strict liability to incur such expenditure. Such decisions in the very nature of things have to be taken from business point of view and have to respected by the authorities no matter that it may appear to the latter that the expenditure incurred was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees, and the same has actually been paid to the employees (initially by the AEs which were subsequently reimbursed by Mars India). Accordingly, in light of the above judicial guidance, the Ld. AR submitted that the payment made by the assessee towards reimbursement of salary of seconded employees should be accepted to be at arm s length. 13. As relates to the issue of Testing charges amounting to ₹ 60,15,359 i.e. (1,39,809+58,75,550), the Ld. AR submitted that the assessee as part of its business operations sent sample raw material and finished goods for testing of nutrition, quality to its AEs which have been reimbursed on cost to cost basis. The same was at Page 105 of appeal set which was shows the nature of testing charges. Page No. 351-354 of the paper book are the copies of E-mails correspondence which explain the functions undertaken by Master Foods CP regarding testing of goods. Page No. 355-371 of the paper book are the testing cost charged to different Mars units bifurcated into internal cost and external cost across the world which had sent samples for testing to Master Foods CP for the month of august which clearly show that Mars unit regularly sent sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icenses, central server costs, required site visits, software updates, instrument lamps and troubleshooting. The calibration costs : It covers all activities required to develop and maintain the actual calibrations, including wet chemistry reference analysis, and resources from the central team. The Ld. AR submitted that the debit notes from Mars Netherlands on a year to year basis have been attached from page No. 393 to 416 of the paper-book. The Ld. AR submitted that these are the evidence that the employees came to India for NIR commissioning project. Page 106 of appeal set also explains the nature of NIR charges. 15. The Ld. AR further submitted that the cost contribution allocation which represents common shared/pooled cost incurred by the AEs for on and behalf of group entities and reimbursed on cost to cost basis. Page No. 194-197 of the Paper Book is letter to TPO explaining as to how CCA is not intra group services. Page No.198-199,200-201,202 of the Paper Book are letters to TPO explaining key of allocation being sales and explaining the details of cost based of services stream flowing from AE and that there is no mark up charged by AEs. The share of Regional Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the operations of group entities worldwide. Mars India receives support on an ongoing basis from Mclean on all strategic issues. This cost contribution was paid in pursuance of the cost sharing agreement entered into by the assessee. The Ld. AR refer page 240 of the paper-book and also attached copy of the agreement which is at page 651- 660 of the paper-book. The Ld. AR submitted that the cost allocated under this head includes inter alia salaries, wages, etc. In line with the agreement, Mars India contributes its share in the corporate costs incurred by Mars Inc. on the basis of the sales revenue. It is pertinent to mention that Mars India was allocated less than 0.1% of global cost). The Ld. AR also pointed out the certificate(s) issued by an Independent Auditors in McLean wherein it has been certified that the basis of allocation of the corporate services costs incurred by Mars Inc. was carried out on a prudent basis and is in line with the provisions of the agreement. The same are referred at pages 547-562 of the paper-book. Further, debit notes which was issued by Mars Inc. for the allocation are attached at page 563-568 of the paper-book. 17. As relates to Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A NO. 8753/MUM/2010) Cushman Wakefield India Pvt. Ltd. Vs. ACIT (ITA No.3933/Del/2010 ) McCann Erickson India Pvt. Ltd. (ITA NO. 5871/Del./2011) EKL Appliances Ltd.(TS-206-HC-2012(Del) ) Ericsson India Private Ltd. (TS-319-ITAT-2012(Del) ) Therefore, the Ld. AR submitted that the adjustment undertaken by the TPO/AO is merely based on presumptions. Accordingly, the addition made by the TPO/AO ought to be deleted as per the Ld. AR. 18. As relates to provision of Interest Free Loan, the Ld. AR submitted that it has received continued support from the group for carrying on business in India. The Mars group has given huge subsidies to Mars India by providing an interest free loan of INR 98 crores. The Ld. AR submitted that in case the group companies wished to charge Mars India, they could have easily charged the same in form of interest. However, the intent of the group is to support the company and not to take the money (out of India) from illegal means as alleged. The TPO has by application of CUP method, derived the arm s length price of the transaction relating to management cross charges to be NIL. The Ld. AR pointed out Rule 10B(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employee (Guy) in the immediately preceding year (AY 2005-06) which was assessed under section 143(3) and no disallowance in respect of such reimbursement was made by the AO. In the instant case, the remuneration has been agreed upon between two independent parties, i.e., the assessee and expatriate employees, and the same has actually been paid to the employees (initially by the AEs which were subsequently reimbursed by Mars India). The payment made by the assessee towards reimbursement of salary of seconded employees has to be accepted to be at arm s length. the assessee in its TP report has benchmarked the reimbursement by applying CUP method and therefore, the statement made by the TPO is without any basis. The Ld. AR has made out the case that for the salary expenses paid to the AEs, the assessee has not received any service from its AEs. The submissions made by the Ld. AR services were received from the employees based in India and it is only for administrative convenience that their salaries were paid outside India by the AEs, which were subsequently reimbursed by the assessee. Therefore the question of receiving benefits as stated by TPO does not arise at all. These fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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